New European and South American Experience of White Certificates · 2020. 4. 10. · White...

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European and South American Experience

of White Certificates

WEC-ADEME Case study

on Energy Efficiency Measures and Policies

Eoin Lees

March 2010

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Contents Page no.

1. Introduction 1

2. Existing White Certificate or Energy Efficiency Obligations in 1

Europe and South America

3. Experience from the 5 European Individual Countries and Brazil 5

3.1 Target Sector & Size 6

3.2 Interaction with Other Policy Mechanisms 7

3.3 Nature of Target 8

3.4 Definition of Eligible Measures 9

3.5 Monitoring and Verifying of Energy Savings Attained 10

3.6 Supplier or Distribution Obligation. Which is Optimum? 11

3.7 Meeting the Target 12

3.8 Trading of WCs 12

3.9 Energy and Carbon Dioxide Savings 13

3.10 Financial Costs and Benefits Arising from Energy Efficiency 14

Obligations

3.11 Energy Service Companies (ESCOs) and WCs 15

3.12 Reduction in peak demand 16

4. Lessons Learned 17

5. Relevance of Energy Efficiency Obligations to Developing Countries 18

Case Studies

1. Brazil

2. France

3. Italy

4. UK

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1. Introduction

This report builds on and expands the coverage of the previous report for the World

Energy Council and ADEME on White Certificates. The previous report reviewed and

evaluated the European experience in using White Certificates as an energy policy tool

to stimulate energy efficiency measures and highlighted considerations regarding the

relevance of such obligations to Developing Countries. This new report updates the

previous one on the European experiences including some additional criteria and

considerations and includes the experience to date in South America of similar

schemes (Sections 2 and 3). Sections 4 & 5 deals with the lessons learned from all

these activities to date and their relevance to Developing Countries.

The Appendix contains more details of some of the individual countries in the form of

case studies. This covers the 3 largest EU activities (developed countries) and one

emerged economy (Brazil).

2. Existing White Certificate or Energy Efficiency Obligations in Europe and

South America

Table 1 lists those countries which have currently got active and significant policies in

the form of either White Certificates or Energy Efficiency Obligations on energy

companies in Europe and South America.

Table 1: EU and South American Countries with currently active and significant

Energy Efficiency Obligations.

Country

Obligated

Company Eligible Customers Target set by Administrator

Belgium-

Flanders

electricity

distributors

residential and non

energy intensive

industry and service

Flemish

Government

Flemish

Government

Brazil

electricity

distributors/

suppliers (not

split) All except transport Government

Regulator

(ANEEL)

Denmark

electricity, gas

oil & heat

distributors

All except transport

and those covered by

EU ETS Government

Danish Energy

Authority

France

all suppliers

of energy

All (including

transport) except those

covered by EU ETS Government Government

Italy

electricity &

gas

distributors All including transport Government

Regulator

(AEEG)

UK

electricity &

gas suppliers Residential only Government

Regulator

(Ofgem)

The approach to White Certificates or Energy Efficiency Obligations on energy

companies has developed very differently with different obliged parts of the energy

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industry and a wide variation in the end use sectors to which the obligations are

applied1. There are various reasons for that including historical structures of the energy

industries in different countries, the previous history of energy efficiency experience

linked to energy companies and the extent of market liberalisation. Nevertheless such

obligations have been shown to be extremely flexible and have proved capable of

moving with the energy industry from their original monopoly position into fully

liberalised markets, i.e. such obligations can work either with a traditional monopoly

energy utility or in a fully liberalised market.

Table 2 provides some details of the nature of the targets, their size and other key

parameters in existing Energy Efficiency Obligations. The cost estimates in Table 2

relate to energy company expenditure and are indicative rather than precise. It should

be noted that Denmark is embarked upon an expanding programme which in 2010 will

expand by 83% from the current size of the obligation and is expected to produce

annual energy savings equivalent to 1.2% of present Danish consumption. Another

important Danish difference from most of the existing EU Energy Efficiency

Obligations is that there are many more obliged players (over 200 in Denmark) than the

smaller numbers in UK, Italy and France2.

Table 2: More details on the EU & South American Energy Efficiency Obligations

in place in 2008.

Country

Nature of

saving

target

Current

size of

target

Discount

rate

Cost

estimate

(€M/yr)

Penalty if

miss target? Trading?

Belgium-

Flanders

Annual

delivered

energy

0.58 TWh

annual n/a 25.8

10€/MWh

missed + fine

not eligible

for tariff No

Brazil

Annual

money

expenditure

0.5% of

electricity

revenue n/a 120 No

Denmark

Annual

delivered

energy

0.82 TWh

annual n/a 25

Linked to size

of under

performance

Only

between

distributors

France

lifetime

delivered

energy

54 TWh

over 3

years 4% 180

20€/MWh

missed Yes

Italy

cumulative

primary

energy

24.7

TWh/year

in 2009 0% 196

Related to

non-

compliance Yes

UK

lifetime

delivered

CO2

185 MtCO2

in 3 years

to 2011 0% 900

Related to size

of miss

Only

between

suppliers

1 In Denmark, there is a legal obligation only for the heat distributors; for electricity, gas and oil distributors, it is a voluntary agreement with the sector as a whole. 2 In France there are actually ~2,500 obliged companies but around 80% of the obligation falls on EDF and GDF-Suez

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Although there are many differences between the ways the targets are set, the size of

the targets, the obligated parties and the energy using sectors covered, there are in fact

many similarities as are outlined in the next section. In particular, the use of deemed or

engineering estimates of the energy savings has resulted in low costs for implementing

and verifying such energy efficiency measures. For example, in the residential sector

although the energy savings will vary from household to household, for either

insulation or indeed new appliance measures being adopted, as long as the average

energy saving has been established, then the use of a deemed or ex ante savings will

represent the real situation because of the large numbers of households involved. In the

commercial and industrial sectors, then engineering estimates or scaling of known

energy savings according to the size of the plant again provide a simple and robust

method for determining energy savings.

This report concentrates on the four major activities which have been underway for

some time and which are of a significant scale. It should also be noted that there is an

alternative approach which simply uses the energy companies as a way of raising funds

for Government. Such an approach has been adopted in both Spain and Portugal. In

Spain, a levy equivalent to 1.5% of fuel bills is raised on electricity and gas distribution

companies to provide a “pot of money” to which is added funds from the central

Government and European regional development funds; the levy on Spanish energy

customers raises 70% of the 0.47 billion per year to be utilised as public funding of the

initiatives in the 5 year period of the Spanish Energy Action Plan. The autonomous

Spanish regions are responsible for the delivery of the Action Plan in their region.

There is growing interest in such energy efficiency obligations both in the EU and also

South America.

In the EU, Energy Efficiency Obligations will be placed on energy suppliers in Poland

in 2010 and similar activities are under consideration in the Netherlands. In Poland, the

White Certificates are intended to support a wide range of energy efficiency

investments: on the supply side (electricity generation, heat and power plants,

municipal and industrial boilers), the energy distribution systems (electricity, gas and

heat) and end use efficiency in all sectors except transport. However it is proposed that

70% of the savings should come from the end use sector with the remaining fractions

split equally between generation and transmission & distribution. The targets are to be

set by the Government but the Energy Regulator (URE) determines the details,

exercises control of the programme and imposes penalties on those failing to meet their

obligations. Trading is done through the power exchange (similar to Italy). Finally

there is a separate office which is responsible for benchmarking, monitoring and

promoting the White Certificates. There will be a minimum size of White Certificate,

probably 1toe and there will be a catalogue of energy efficiency measures which are

approved.

One novel feature proposed for the Polish system is that there will be a tender

procedure for winning support from White Certificates. Perhaps the most innovative

and potentially high risk aspect relates to the premise that winning the tender means

automatic issuance of the White Certificates obtained. This is in contrast to the rest of

the European schemes where White Certificates are only awarded after the successful

installation of the energy efficiency measures. After winning the tender, the certificates

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can be sold on the market and to the companies which are obligated. The obligated

companies in turn redeem the certificates to URE. Proponents of the scheme are

estimating an indicative price of €600 per toe saved and between 2-3% of the energy

sector’s annual turnover value as the likely cost, i.e. up to €0.56 billion per year.

In South America, Uruguay passed an energy efficiency law in October 2009. This was

wide ranging (e.g. creating new institutions, energy labelling and minimum

performance standards etc.). The law also gives power to the Uruguay Government to

establish mechanisms for certification, promotion and financing energy efficiency. In

particular, a Uruguayan Saving Trust for Energy Efficiency (FUDAEE) will be

established to provide funds for energy efficiency activities. These include technical

assistance in energy efficiency, national promotions, help in financing energy

efficiency investments (guarantee fund) and R&D. The envisaged share of the funding

is 60% for the annual goal of energy saving through Energy Efficiency Certificates, up

to 15% for national promotions and up to 7% for the guarantee fund. FUDAEE will be

administered by the National Corporation for Development which in itself is linked to

the Central Bank of Uruguay.

The Uruguayan Government will establish the annual targets but FUDAEE will manage

the new Energy Efficiency Certificate mechanism. A key source of funding for

FUDAEE will come from 0.13% levy3 of total energy sales from energy providers.

However, the energy providers may deduct up to 30% of their share of the levy if they

submit Energy Efficiency Certificates acquired in previous years from their energy

service activities.

3. Experience from the 5 European Individual Countries and Brazil

The common experience to date in the five European countries and Brazil is listed

below. (The Brazilian and three European case studies (see Annexes) give more details

of the individual experience of the largest obligations as these also broadly cover the

wide range of possible options.) Although an attempt is made to try and report in a

common format, the programmes do vary considerably in their nature, in the length of

time that they have been running and the extent to which they have had independent

evaluation which is publicly available. Consequently it is not possible to cover all

aspects to the same extent.

The common features about the Energy Efficiency Obligations are that some part of the

energy chain (supplier/retailer or distributor) has a legal obligation placed upon them to

promote and stimulate investment which will save energy in their customers’ premises

or households. When this obligation can be met involving the buying or selling of the

energy saving credits towards the obligation, this is usually called White Certificates.

As can be seen in Tables 1 and 2, the size of the target, the end using sectors to which it

applies, etc vary from country to country but the key principles are that an obligation is

placed on an energy company by Government and that a formal monitoring and

verification process is enacted to ensure the targets are met by the promotion and

installation of eligible energy saving measures. As was seen in Table 2, most countries

have penalties for those energy companies which do not fulfil their Energy Efficiency

3 After 5 years this may be increased to 0.25%.

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Obligation. In practice, no penalties have been issued as virtually all the obligated

energy companies have met their targets.

3.1 Target Sector & Size

As Table 1 has shown, there is considerable variation in the end use sectors which are

covered by White Certificates. In practice, as shown in Table 3, most of the activities

have been focussed on the residential sector. In Brazil, the focus on public lighting was

for a variety of commercial reasons but since 2005 the electricity companies have been

required to spend at least 50% of their funds on low income households and so Brazil

now conforms to this pattern.

Table 3: Breakdown of Energy Savings by end use sector in Energy efficiency

Obligations (note the different time periods).

For those EU countries where there is freedom to choose between the end use sectors to

achieve their targets4, only Demark (in view of its electricity companies’ previous

activities solely with the non-residential sectors) has a significant activity outside the

residential sector (58%).

The view of the present author is that White Certificates are best suited to those end use

sectors for which the options of emissions trading are unlikely in the foreseeable future,

i.e. end uses involving customers in households and small businesses or organisations.

Usually the size of the target and the sectors to be covered are decided by Government

rather than the Regulator for that energy industry although often the Regulator is the

appointed body to oversee and verify the energy efficiency obligation process. Having

national Governments decide on the size of the obligation seems appropriate as energy

efficiency obligations are linked to environmental concerns and have an important

4 Flanders has prescribed annual energy saving targets from 2008 of 2% (residential) and 1.5% (non residential) of the electricity delivered to these sectors. Most of the non residential savings will come from the tertiary sector (Flemish National Energy Efficiency Action Plan 2007)

Residential (electricity & heat)

Commercial (electricity & heat) Industry Transport Other

Brazil 1998-03 22% electricity 9% electricity 14% electricity N/A

55% public lighting

Italy 2005-08

83% (60% electrical + 23% heating) 0% 10% 0

6% (public lighting; 3% CHP & district heating)

Flanders 2008 58% 42% N/A N/A

France 2006-09 86.7% 4.3 % 7.4 % 0.4 %

1.3% (district heating)

UK 2005-08 100% N/A N/A N/A N/A

Denmark 2008 42%

50% trade and industry N/A 8% public sector

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social dimension. It is not easy for an unelected Regulator to make judgements which

are not solely based on economic grounds and which can have a significant impact on

energy bills in the short term. The targets are set in relation to the volume of electricity

supplied or distributed. In the residential sector, the simple proxy of customer numbers

is often used rather than volumes of electricity.

As can be seen from Table 2, the cost or implied cost varies considerably but even in

the UK it is currently less than 4% of household fuel bills. It is also worth noting that

for the USA demand side management activities, there is a similar range of costs to end

use customers for the energy saving measures, e.g. the range extends up to the Vermont

level of 5% of end use bills being used to support the delivery of energy efficiency.

Most of the Energy Efficiency Obligations allow “banking”, e.g. the carrying forward

of excess savings from one target period to the next. This has important benefits, not

just for the obligated energy company but also for the energy efficiency industries as it

avoids a “feast or famine” demand for their services.

In Brazil, Flanders and the UK, the obliged energy companies are required to ensure

that there are savings in low income households. This is achieved by ringfencing a

fraction of the energy saving target that has to be met by savings in such households.

3.2 Interaction with Other Policy Mechanisms

Inevitably national Governments have a variety of policies designed to improve energy

efficiency in all end use sectors. There can be complications from interactions between

such policies which are either required by legislation or are subsidised by central

Government and the obligations on the energy companies.

In other words, is there either genuine additionality (in the case of existing legislation

requiring Minimum Performance Standards of energy efficiency) or double subsidies of

the measure by Government (at all levels) and the energy company?

A pragmatic approach has been taken to dealing with these issues in all countries. For

example, only energy efficiency measures which produce a performance better than

that required by legislation (e.g. in new build or major refurbishment or EU Minimum

Performance Standards for Appliances) are accredited as eligible energy savings and

only for that part which is in excess of the regulatory requirement. Several countries

have gone further in the appliance field by only allowing an energy saving for an

energy efficient appliance or heating boiler which is well above the market average of

such products (e.g. in the EU several countries now only accredit energy savings from

the installation of refrigeration products with an EU energy label of A+ or A++).

In a similar vein, countries disallow that fraction of the savings which are supported by

any other central Government funding. However, in Italy and France, certain energy

efficiency measures can be offset against income tax and still be eligible for support

from energy subsidies via White Certificates. Similarly, in Brazil prior to 2005, one of

the reasons why the public lighting programme proved so popular with distribution

companies was that there was an activity by Procel and Electrobras (the main electricity

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company) to fund 75% of the investment of new public lighting systems at very low

rates of interest. The remaining 25% could be funded through the distribution

obligation but the whole cost of the investment can be counted towards the fulfilment

of the 1% wire charge obligation. In these circumstances, it is doubtful if the

deadweight for public lighting programmes in the Brazilian Energy Efficiency

Obligations is small.

3.3 Nature of Target

As Table 2 showed, there is widespread variation in the nature of the target set. There

are of course local reasons for why this might be the case but it is perhaps worth

running through some of the key considerations here.

In the EU, the energy saving credits are based (or in a few cases measured) on the

saving of delivered energy. For countries concerned about reducing their energy

imports, then the use of primary energy (which is usually taken to be 2.5 times

delivered energy for electricity with the other fossil fuels being taken as equivalent to

their delivered energy) is common. For countries which are concerned about reducing

carbon dioxide, then as in the UK, the energy savings were weighted by the carbon

content of the saved fuel and since 2008, the target is explicitly CO2 savings. In Brazil

the target is annual expenditure and each distribution company submits proposals which

estimate the expected energy savings from the project and ANEEL (the energy

regulator) approves or rejects these. To date, the ex post evaluation in Brazil has

tended to focus mainly on expenditure verification rather than energy savings.

In terms of for how long the energy savings should be accredited, the two extremes are

simply to accredit annual energy saving and the other is to accredit the lifetime energy

savings. The Italians operate a slightly different system whereby energy savings are

counted for five years but an exception has been made for building fabric measures

where the savings are counted for eight years. This is to partially address the criticism

that by only counting annual energy saving, you discriminate against the longer life

measures. For example, if two measures cost the same and saved the same energy each

year, but one lasted five years while the other saved energy for twenty years, then in an

annual saving target sense there would be no difference although in reality the energy

and carbon savings for the longer life measure would be four times as great.

The other issue for debate is whether the energy savings should be discounted over time

to reflect the time preference of money as is common in normal financial appraisals.

The discount rates have varied between 8% and (currently) 3.5-4% where used. The

key question is perhaps whether this is being done for economic or environmental

reasons. If for economic reasons, then the use of discount rates merely conforms with

standard energy appraisal options. However, if being done for climate change reasons,

then it is perhaps not so clear that it is appropriate to discount the energy and

consequently carbon dioxide savings, certainly with a high discount rate. Climate

change is driven by the concentration of carbon dioxide in the upper atmosphere and

once released, a carbon dioxide molecule lives for the order of 100 years in the upper

atmosphere. Thus it is the total amount of carbon saved rather than the annual carbon

savings which are more important and given the length of the carbon dioxide molecule

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life time, it may be that standard financial discounting is not applicable or that discount

rates which are more appropriate to the 100 year half life of the molecule in the upper

atmosphere should be used.

3.4 Definition of Eligible Measures

Most of the eligible measures are usually defined in advance by the monitoring and

verifying authority. This means that it is only measures which have been

independently proven to save energy that are utilised. In one sense this is clearly a

good safeguard for consumers but it has been said that it can mitigate against bringing

in innovative technology. To counteract that, Italy, France and the UK have the option

of allowing energy suppliers to put in innovative technology and to monitor the

resulting energy savings which can then subsequently be claimed.

This option has been rarely used outside the industrial sector and consequently the UK

introduced a specific innovation incentive aimed at encouraging new technology. The

energy company can undertake a demonstration action which is reasonably expected to

achieve a reduction in carbon dioxide emissions but currently does not have a proven

energy saving score; the total costs of the demonstration are then translated into a

carbon dioxide saving based on the Government’s best estimate of saving a ton of

carbon dioxide and this saving is accredited to the energy company irrespective of the

outcome of the demonstration project. If the demonstration is successful, then the

values monitored in the demonstration will be used as the basis for any subsequent

replication of the energy saving measures by the energy company.

To date, most of the obligations have focussed on energy saving measures. This means

that cogeneration, solar water heating and other renewable forms of heating have

generally been included but there has been less promotion of renewable energy

generation technologies. It should also be noted that there are usually different policy

mechanisms in place to support the development of renewable generation technologies.

Although the countries have varied in the end-use sectors to which the obligations

apply, they all have been dominated by the residential sector and Table 3 shows the

energy saving measures employed in the residential sector by the 6 countries. CFLs

have clearly been the mainstay of all programmes though not in France where the

normal retail routes are not eligible for White Certificates. While heating measures

feature strongly in all EU countries, there are marked differences in the appliance and

insulation areas. Some of this can be explained by local conditions, e.g. the UK has

low standards of insulation in its existing stock, but sometimes it is down to different

approaches to energy savings e.g. in France the energy savings from boiler replacement

are relative to the existing boiler stock efficiency rather than the (higher) average

efficiency of the current boiler market.

At present there are few energy saving credits for “behavioural” change measures such

as smart meters with consumption feedback to households, energy efficiency advice,

etc. However, this reflects more the difficulty in establishing firm energy saving values

and the appropriate life time for such measures rather than any fundamental barriers.

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Indeed, provisional values are being used in the UK and further monitoring is underway

to finalise accredited energy savings for the future.

Table 3: Measures employed to save energy in the residential sector in the 5

countries in 2008 (N.B. period is 2006-7 for Brazil).

Measure Brazil Flanders Denmark France Italy UK

Air conditioning units

Appliances: Cold ## ## ## ##

set top boxes/iDTVs #

Standby savers ## ##

Wet # ##

Cogeneration ## #

CFLs ## ## ## # ## ##

Condensing Boilers ## ## (gas) ## # ## till 2008

Fuel switching # ## ##

Glazing ## # ## # #

Heating controls ## ## # # ##

Heat pumps # # ## # #

Insulation: Roof ## # ## ##

Draught proofing # #

Hot water tank # #

Wall # ##

Low flow showerheads ## ##

Low flow faucets (taps) ##

Smart meters

#

n/a

Electricity

consumption

displays

PV panels #(few) # #

Solar water heating # ## # # ## #

Key: ## widely used ; # used

3.5 Monitoring and Verifying of Energy Savings Attained

As mentioned above, the great majority of projects have been carried out by utilities

utilising the deemed or ex ante energy savings, or in the case of industrial and

commercial measures, by scaling engineering estimates of proven energy savings. This

greatly simplifies the monitoring and verification process which in effect becomes the

equivalent of counting the number of energy efficiency measures implemented and can

be verified using the standard “dip check” or random sampling procedure of audits.

In the UK system, energy suppliers submit in advance of carrying out the project an

outline of what they intend to do and the energy savings they are likely to claim. This

has benefits both for the Regulator and the energy company in minimising later

disputes in terms of energy savings achieved. The final accredited energy savings are

of course related to the actual outcome rather than the outline plan. In Brazil, each

distribution company submits proposals which estimate the expected energy savings

from the project and ANEEL approves or rejects these. In the fully traded White

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Certificate schemes, such as operate in Italy, the energy company can provide either the

accredited savings from its own projects or purchase the appropriate number of White

Certificates to meet their targets5.

Obviously, to make the deemed energy saving or engineering estimate approach work

successfully, there needs to be transparent and clear information from the body

responsible for accrediting energy companies with their energy saving values or White

Certificates; such information needs to be published well in advance of the

commencement of the obligation.

3.6 Supplier or Distribution Obligation. Which is Optimum?

This is a question that only arises for liberalised markets where separation of the

supply/retail and distribution activities of electricity and gas companies has occurred.

There are pros and cons of both approaches. In favour of suppliers is that they have

strong links to their customers and, in a liberalised market, increasing marketing skills.

Perhaps the biggest obstacle for using energy suppliers is that the customers perceive it

as “unnatural” for an energy supplier to wish to sell less of its product and consequently

can be suspicious of the energy saving offer.

In favour of a distribution levy is the fact that they are more stable organisations, being

regional monopolies, and are already regulated bodies. The main disadvantages are

that distribution companies’ contacts with customers, in liberalised markets, are usually

only when there is a failure in the wires or pipes business. However, in Italy this has

been turned to an advantage by allowing non obligated parties (such as energy

efficiency installers of equipment) to directly enter the White Certificate market and

has eventually led to greater transparency on the real costs to the energy companies.

Denmark have also said that they intend from 2011to have more involvement from

external parties with the distributors playing more of contract issuing role.

If the supply and distribution functions have been separated into different companies,

there is a greater financial disincentive for energy distributors compared to energy

suppliers to reduce the amount of energy distributed/supplied to their customers

depending on the details of the distribution regulatory system. In the USA and Italy

this problem has been overcome via the distribution regulatory price control. For

example, the Regulator ensures that there are no incentives for the distributor to

financially benefit (or financially be penalised) if the energy transmitted through the

distribution network increases (decreases), i.e. the volume driver in the distribution

price control is removed.

Perhaps the key thing is that both supplier and distribution obligations can be

made to work.

An alternative approach in the USA is similar to the Spanish and Portuguese methods,

whereby a levy is placed on the distribution company to raise funds but the

5 It should be noted that none of the existing White Certificates schemes trade certificates outside of the specific energy efficiency obligation although there is an expectation that in the longer term they might develop into to being traded in wider carbon markets

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responsibility for delivering the energy efficiency activities is an independent third

party. For example, Vermont has contracted the delivery of the energy efficiency

obligations to an independent entity with no commercial interests in either energy

supply or as an installer of energy efficiency measures.

3.7 Meeting the Target

The experience to date in all the European Countries has been that the obligated

companies have easily met their targets. In the UK, on average the energy suppliers

have met their targets with an expenditure of 20% less than the Government expected

and since 2002 have carried forward energy savings from one phase of the obligation to

the next. In Flanders, the energy distributors met their targets at 24% less cost than

budgeted in 2005. In France the first phase target of 54 TWh cumac to be achieved by

July 2009 was exceeded by 20%. In Denmark for the period 2006-8, all obligated fuel

sources exceeded their target (on average by 11%) but some of the individual heat

distribution companies did not; for 2008 the electricity distribution companies exceeded

their target by 25%.

3.8 Trading of WCs

To date, the experience of trading of White Certificates has been somewhat limited.

This is perhaps to be expected because only in the more recent Energy Efficiency

Obligations in Italy (especially since end of 2007) and France are there opportunities

for market players other than the energy companies to independently attain and trade

White Certificates. Thus the market is in its early stages and will undoubtedly grow in

time.

In the UK, trading of energy savings is only permitted between energy suppliers and

has rarely been used. Trading has been used by some energy suppliers to fulfil target

requirements but in absolute terms it has always been very small (<1% of the total

target).

In Italy, initially only 20% of White Certificates were traded on the market and most

White Certificates were done as bilateral or subcontract arrangements between the

energy distributors and energy efficiency installers. There was also considerable

deviation from the cost recovery figure of €100/certificate and the market prices of the

certificates. By 2007 White Certificate prices averaged around €40 for electricity, €77

for gas and €22 for other fuels (see Figure 1).

Following the reforms by the energy regulator at the end of 2007, the market for White

Certificates has operated more actively. From mid-2008 both quantities and prices of

bilateral deals (i.e. over the counter trades) have to be registered. The obligation to

register bilateral prices has been introduced by AEEG in order to increase the

transparency of trading, to the advantage both of market operators and of the Regulator.

Market signals, if not distorted, monitor the costs incurred by the system to meet its

energy efficiency goals, and they are one of the possible reference parameters for

updating the tariff contribution and defining the penalty for non- compliant parties.

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Between June 2007 and May 2008 Italy saw buoyant trading (mostly bilateral, but an

increasing share of spot market trades). Indeed in 2007, 304,932 certificates were

traded on the spot market and 556,742 certificates were traded bilaterally against an

actual saving target of 633,382 certificates6. More than 80% of the certificates were

issued for energy efficiency projects implemented by non energy obligated parties.

Fig 1: Price of Italian White Certificates from March 2006 to June 2008. Type 1

refers to electricity, type 2 refers to gas and OTC refers to bi-lateral or over the

counter trades as disclosed to AEEG by legal requirements in April 08. (Source

AAEG)

Although, trading of energy savings is not widely permitted in the Flemish and UK

energy efficiency obligations, certain facets are similar. For example, energy

companies may carry forward excess energy savings from one phase to the next.

3.9 Energy and Carbon Dioxide Savings

In Flanders the energy and carbon savings are for electricity users only. In 2005, VEA

(Flemish Energy Agency) reported that the electricity distributors had obtained 568

GWh/y delivered electricity savings in their non residential customers and 414 GWh/y

in their residential customers7; both figures are inclusive of deadweight. In principle,

cumulative annual energy savings from the first 3 years of the obligations (2,535

GWh/y) would correspond to over 3% of Flemish electricity consumption but there are

some changes that have been made to how the savings are calculated and there is also

insufficient clarity on how additionality/deadweight has been handled. Similarly, the

reported carbon dioxide figures of a total carbon dioxide saving of 0.37 Mt/y by the end

of 2004 are also subject to the same concerns.

6 The total amount of certificates traded amounted to 136% of the 2007 target: the spot market trades

represented 48% of the saving target whereas bilateral trades represented 88% of this target. 7 The next evaluation of the programme is not scheduled till 2010.

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In the UK, the energy savings in the 3 year period (2005-8) have been evaluated to

achieve discounted lifetime savings of some 46 TWh of electricity and 146 TWh of

fossil fuel for fossil fuels. In terms of annual energy saving, these would be around 3.9

TWh/year for electricity and around 6.3 TWh/year for fossil fuels. The carbon savings

from EEC2 (excluding deadweight) are estimated at 59 million tons CO2 lifetime or 2.1

million tons of CO2 per year in the middle of the Kyoto period 2010 (1.4% of

household emissions).

In Italy the cumulative energy saving targets for 2008 were equivalent to >8 TWh

electricity saving and >18 TWh gas savings (both figures in delivered units). The

Italian regulator has reported that the combined target was easily exceeded but the

contribution from electricity savings was much greater than expected. The 2008 annual

savings target (2.2 Mtoe/year) corresponds to 1.8% and 1.4% of Italian electricity and

gas consumption respectively. The 2008 Italian target of 2.2 Mtoe/year with the above

mix of fuels saved implies that the carbon dioxide savings are over 4 Mt CO2/year8.

In France, the actual energy savings achieved in the period 2006-9 were estimated by

Ademe to be equivalent of 0.6% of energy consumption in French buildings or the

equivalent of 0.3% of national consumption. However, it should be borne in mind that

these figures would be considerably lower if boiler saving estimates were treated the

same way as in other EU countries with energy efficiency obligations (see French case

study for more details).

3.10 Financial Costs and Benefits Arising from Energy Efficiency Obligations

Partial data are available for Flanders, France, Italy and the UK. The costs and benefits

are viewed from an energy company’s perspective and from a national perspective.

The former only considers expenditure by the energy supplier; the latter includes the

costs to all participants, i.e. energy companies, customers, third parties (e.g. local

authorities, landlords, manufacturers, charities etc.)

3.10.1 The energy company perspective

Irrespective of the details of the energy efficiency obligations, the obliged energy

companies try to meet their targets in the most cost effective manner possible within the

“rules of the game”. This does not necessarily correspond to the optimum when viewed

from a national perspective. Using published data, broad estimates for cost

effectiveness from an energy company perspective have been derived as shown in

Table 4.

Comparison is complicated by the difference between the targets (annual or lifetime),

the use of a discount rate (3.5%) for lifetime savings, the different measure mix and

hence average lives. Consequently the estimates are indicative rather than precise. The

estimate for Italy is derived using a market price for White Certificates for electricity of

€89/toe primary energy saving. For France, data were supplied by Ademe. For the

8 This is higher than the 3.9 MtCO2/year expectation of the original target due to the higher contribution from electricity savings than originally expected (electricity CO2 content/kWh in Italy is more than a factor of 2 higher than the equivalent figure for natural gas).

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UK, the cost in c€/kWh for all parties was adjusted to include only energy supplier

contributions to the cost of delivering the measures.

Table 4: Comparisons of cost effectiveness from an energy company’s perspective

for delivered electricity savings in the residential sector.

Country & year Cost to save electricity

(c€/kWh)

Italy 2008 1.9

France 2006-9 0.33

UK 2005-8 1.6

The reason for the much lower cost effectiveness figure for France is linked to the

significant tax breaks available for households (e.g. for boilers, heat pumps, insulation

etc.) which the energy suppliers tended to market and hence resulted in lower direct

subsidies from the energy suppliers. In other words the subsidy to the consumer was

provided by the taxpayer and the energy suppliers mainly spent their money on

marketing costs.9

3.10.2 The national perspective

Insufficient data have been published for Flanders and France to make any estimate

possible; likewise for Italy. The only readily available data are from the UK and the

results from the evaluation of the energy efficiency obligations which ran from 2005-8

are used here – see Case Study 4 for more details.

The net resource benefit for saving each ton of carbon dioxide is around £53 (€60), i.e.

the net present value of the ongoing energy savings set against the costs of all the

parties involved is such that the UK benefits by £53 (€60) for every ton of carbon

dioxide saved.

The net present value of the measures necessary to meet the 2008 target after including

all party costs and benefits (including comfort but excluding deadweight) was £3.1

(€3.5) billion over the life time of the measures discounted at 3.5%. This NPV figure

includes a total cost to all players of £1.3 (€1.5) billion.

An alternative way of looking at this in more familiar units is to look at the cost to the

nation of saving a delivered energy of electricity or gas. This was 2.2 c€/kWh for

electricity and 0.8 c€/kWh for natural gas; both figures are considerably less than the

average consumer prices during that period of 11 c€/kWh and 2.9 c€/kWh respectively.

3.11 Energy Service Companies (ESCOs) and WCs

Part of the policy objectives of Energy Efficiency Obligations is to either encourage the

development of energy service companies ( ESCOs) and/or to change the mindset of

energy companies that they see themselves moving from being “suppliers of a

9 Figures from Ademe indicate that EDF spent €3.2 million on direct costs and €30.9 million on indirect costs

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commodity” to providers of sustainable energy solutions. However, there are problems

in both the definition of what is meant by an ESCO and the extent to which these are

understood and accepted by the end use customer.

In the UK, the Government has encouraged the development of the ESCO concept by

enhancing any of the attained savings by an uplift factor worth 50% of the actual

savings. Despite this, progress with ESCOs has remained very limited in the residential

sector due to the complexity of the concept and the basic mistrust by customers that any

energy company would wish to sell them less of their product!

In Italy, a wide definition of ESCOs has been used which includes basic energy

efficiency providers and consequently only a few per cent are ESCOs as would be

understood by the EU Energy Services Directive. By 2006, 577 “ESCOs” were

accredited with the Italian regulator – this allows them to use the on-line system to

submit projects. There appear to be no contracts involving a guaranteed savings.

However, it would appear that this is the only country which has non obligated actors

significantly operating in the market place and has resulted in greater transparency than

exists in the other countries.

In Brazil, in recent years it is reported10

that the Brazilian ESCO industry (Energy

Service Company) owed its survival largely to the wire charge mechanism as the

Brazilian Association of ESCOs reported that the regulated energy efficiency

programmes were their main source of income. As is to be expected from the above

discussion, their activities were in the industrial and tertiary sectors. Nevertheless, the

judgement of REEP was that the scale of Brazilian ESCOs was small relative to the

potential.

In conclusion, although there has been significant progress in increasing the rate of

installations of energy efficiency measures through the Energy Efficiency Obligation

route, there is less clear evidence that the market has widely adopted the genuine ESCO

concept. At present, the judgement is that the ESCOs are most likely to succeed in the

larger energy user sectors but that with the present state of consumer understanding that

the ESCO approach to individual householders is still too difficult a “sell”.

3.12 Reduction in peak demand

A precise evaluation is beyond the scope of this paper, not least because of the different

technologies which reduce the peak demand in different seasons. For example in

northern Europe, the peak demand is in winter and so CFLs will be important; in Brazil

and Italy, the peak demand is in the summer and so efficient air conditioning will be

important. Additionally, efficient appliances and information & communication

technologies will save energy throughout the year and so contribute to reducing either

summer or winter peaks.

Eyre et al11

attempted a similar broad estimate by assuming that the energy savings

followed the load curve. This can be either an over or underestimate depending on

10 http://www.reeep.org/file_upload/2785_tmpphpC9wvEx.pdf 11 N J Eyre et al at eceee summer conference 2009

http://www.reeep.org/file_upload/2785_tmpphpC9wvEx.pdf

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which season the peak demand occurs and the energy efficiency measures itself. The

present analysis has reviewed that work and concluded that by 2008, the peak reduction

for the UK is at least 0.4 GWe and probably double that; for Italy, due to CFL savings

dominating the energy savings and the load peak being in the summer, it is likely to be

less than 0.3 GWe; for France, due to the dominance of boiler savings in the French

scheme, it is likely to be less than 0.1 GWe; and for Denmark approaching 0.1 GWe.

4. Lessons Learned

From the preceding discussion and Case Studies 1-4, it is clear that although Energy

Efficiency Obligations are increasingly used in Europe and South America, there are

considerable variations in the way that they are applied and on whom the obligations

are placed. Equally clear is that the obligations have been a success and are expanding

in those countries which have implemented them.

From this experience, the key lessons for successful obligations are:

Energy Efficiency Obligations have been shown to work in both monopoly and

fully liberalised situations and both on the supply and/or the distribution elements of the

energy chain; these energy savings would not have been achieved without recourse to

energy regulation.

There needs to be a clearly defined part of the energy supply and/or distribution

chain upon whom the obligation to save energy in their customers’ premises is placed.

The obligations to date have been delivered mainly in the residential sector due to

the use of the deemed savings approach and the large number of potential recipients

who can benefit from such energy efficiency measures; by extrapolation such

obligations are best suited to those sectors with low individual energy demand and for

which trading arrangements cannot be envisaged in the near future.

There are considerable differences in the values and the way that the deemed energy

saving values are determined (e.g. the allowance for “snap back” or increased amenity

effects, the heat replacement effect for appliances and lighting etc., whether

replacement boiler savings are measured against the historic stock average or the

current market place average efficiency). Some of this is inevitable due to climate

differences and the different stage of the energy efficiency markets in different

countries but a more consistent monitoring and verification protocol would permit

easier identification and transference of best practices. Until such a consistency is

attained, these problems are likely to hinder the development of a European wide White

Certificate mechanism.

By using deemed or ex ante savings, the administration, monitoring and verification

costs can be kept low, typically <1% of total energy company expenditure; any

criticisms of the lack of accuracy are more than compensated by the benefits of

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allowing such projects with individually small energy savings to proceed. However, it

is important to get these savings value accurate as the energy company will naturally

focus on the most cost effective measures viewed from their perspective and mistakes

can lead to priorities for the companies which are not correct from a socio-economic

perspective.

To date, the Energy Efficiency Obligations have largely operated without

significant trading of their energy savings (White Certificates); while it does add cost

and complexity, the additional costs are not a major factor when compared to the

potential benefits of competition and increased transparency. Many countries remain

convinced that this is the way forward.

There has been a growth in energy efficiency activity and the obligations have

stimulated new approaches and routes to market; however, outside of lighting, there has

been little technological innovation with the focus being on expanding the number of

well proven energy efficiency measures in use; as a policy to deliver energy savings

rather than innovation, this is to be expected.

Behavioural measures have not yet played a major part in the energy savings

counted towards meeting the energy companies’ targets; in part, this is due to the

difficulty of establishing reliable deemed savings but given the long term importance of

changing behaviour in tackling climate change, this is an area that warrants further

effort.

The concept of additionality or free riders (those that would have invested in the

energy efficiency measures even without the energy company involvement) has to be

addressed; at low levels of activity it can be dealt with and minimised on a project by

project basis but as the supplier activity grows, it is probably most sensibly dealt with

by incorporating the deadweight into the energy company’s target.

The “rules of the game” need to be clear and transparent to all and should not be

changed except in exceptional circumstances to ensure regulatory certainty for the

energy companies.

Energy Efficiency Obligations are attractive for Governments as the cost of the

obligations is not met by the Government; the costs to date are typically around the 1-

4% of energy bills and considerably less than the financial benefits of the energy saved.

All consumers pay (explicitly or implicitly) through their energy bills to the cost of

the obligations, yet the financial benefits flow to those consumers who have energy

efficiency installations. This can be partly addressed by ring fencing some of the

activity for low income households and by using low cost measures such as CFLs

which spread the benefits widely; however the environmental and energy security

benefits are shared by all.

5. Relevance of Energy Efficiency Obligations to Developing Countries

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Translating these experiences to Developing Countries, the most relevant relate to the

electricity industry. Developing Countries have a priority to increase the access of their

citizens to the benefits of electricity and there can be competition between capital

expenditure on increasing the electricity supply and on reducing the energy demand

through energy efficiency. In principle, these objectives are not in conflict but in

practice with constrained cash flows, they inevitably are. Energy Efficiency

Obligations offer a way for Governments to tackle energy efficiency at a fairly modest

increase (1-2%) on electricity customers’ bills. Furthermore, as energy efficiency is so

cost effective, then this 1-2% modest investment will pay for itself fairly rapidly over a

few years.

My judgement is that it is the Energy Efficiency Obligation rather than the White

Certificate mechanism which would be important in Developing Countries. The

experience to date in Europe with White Certificates is limited and requires financial

infrastructure and knowledgeable and skilled market players. However as the benefits

from Energy Efficiency Obligations are overwhelmingly large, then countries such as

Flanders, France and UK demonstrate that even without the benefit of full trading

mechanisms, there still are significant financial benefits.

There does need to be a clear framework for operating Energy Efficiency Obligations

and in particular, the use of deemed savings considerably reduces the “administration”

expenditure, freeing up more resources for energy efficiency investment. Developing

Countries will need to establish deemed savings for their own local circumstances

although many electrical end uses are increasingly global, e.g. energy efficient lighting

and appliances, etc. Furthermore, by tying in with the mechanisms being developed for

Clean Development Mechanisms and/or voluntary carbon off-setting schemes, there

could be an additional source of revenue forthcoming to further the energy saving

activities.

Overall, it is judged that the barriers to establishing Energy Efficiency Obligations from

perspectives of technical knowledge, administration, monitoring and verification are

not insurmountable. The benefits that would flow to Developing Countries from the

introduction of Energy Efficiency Obligations are identical to those that apply in the

EU and South America, i.e. financial benefits to consumers in the long run, less need to

import energy, and reduced impact on the environment, particularly through reduced

carbon dioxide emissions from fossil fuels, though the relative importance of these will

vary from developing country to country. There are likely to be job creation benefits to

be included as well.

Two possible approaches for energy efficiency obligations on electricity companies

spring to mind:

saving electricity in situations where energy inefficient technology is already in

use

encouraging energy efficiency technology in new customers benefiting from

electricity for the first time.

Again, it is likely that the relevance and priority of each option would depend on local

circumstances and would require cost benefit analysis in each developing country.

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However, the main conclusion remains that energy efficiency obligations could be an

important policy option for developing countries in meeting their sustainable

development goals of lower long term costs of electricity services for consumers and

commerce, increased energy security and improved environmental performance.

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Case Study 1: Brazil

1.1 Context

Brazil has had a public benefit wire charge mechanism in place since 1998. This

coincided with the reforms to the electricity industry and the appointment of the

Agencia Nacional de Energia Eletrica (ANEEL) as the Regulator. This placed a legal

obligation of a wire charge of 1% of annual utility revenues which must be used

(primarily by the utilities themselves) for the public benefit investment in energy

efficiency, research and development and energy planning12

. The plan was to have a part managed by utilities (R&D and EE), with the regulator's oversight and the other part managed by a board of representatives from the public sector, academia and private sector.

There is also a national electricity conservation organisation known as Procel which

promotes the rationalisation of production and consumption of electricity. Originally

created in 1985 by the Government, it was managed within the national electricity

utility, Eletrobras13

. In 1991 Procel was transformed into a Government programme

but it still depends on resources from both the Eletrobras and a federal fund (Global

Revision Reserve RGR) which uses funds from utilities in proportion to their utility

revenues. Eletrobras still manages the funds from RGR. Further funds are sought from

international organisations to expand the activities of Procel. The projects have ranged

from “Light for All”, a national programme for public lighting and energy efficient

signals, energy efficiency in public buildings and energy efficiency in environmental

sanitation.

The Brazilian electricity sector in 2006 had ~ 100 GW of installed capacity with 77%

of this being hydroelectric and 21% thermal power plants. Electricity was supplied to

187 million customers who were responsible for 390 TWh consumption. On the

generation side, over 96% of the electricity generated was from state owned companies

whereas more than 80% of the electricity sold is through private distribution utilities.

The average growth in electricity demand in the period between 2002 and 2006 was

approximately 4.7% per year. Due to the rapid growth in Brazil’s economy, there were

energy shortages in the summer of 2001/2 due to low river levels and Brazil introduced

energy rationing during that period. They introduced a two tier rate signal charges

where above a preset limit, a significantly higher price was charged. Brazil also

introduced mandatory targets for saving energy that varied by sector. Households using

less than 100kW had no savings target. Penalties and incentives were introduced, e.g.

customers who did not meet their targets were subject to interruption of supply and

12 Much use has been made of a series of presentations and publications by Gilberto Jannuzzi (Univsidade Estudual de Campinas (UNICAMP)) on the wire charge experience in Brazil as an information source, in particular “Incentives and Disincentives for Utility Driven DSM in Brazil” Gilberto Jannuzzi, March 2008 13 Eletrobras is the state owned utility responsible for 38% of Brazil’s generation, most of its transmission (either directly or as part of a consortium) and for 6 of the smaller distribution companies.

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consumption in excess of the quota was also subject to price increases of 50% for

customers in the 210 – 500 kWh annual consumption.

Total sales by the distribution companies in 2006 were €25 billion meaning that around

€125 million is invested annually in energy efficiency utility programmes. Even

though the amount devoted to energy efficiency has reduced from the value in the early

part of this decade, the amount coming from this remains several times higher than the

Procel expenditures for energy efficiency measures.

1.2 Objective

The introduction of a 1% public benefit charge was to ensure that public interest

programmes such as energy efficiency and research and development were not lost in

the restructuring of the electricity market.

The wire charge generates substantial funds to be used for energy efficiency and

renewable energy investments. Furthermore, in recent years it is reported14

that the

Brazilian ESCO industry (Energy Service Company) owed its survival largely to the

wire charge mechanism.

It should be noted that in Brazil as nearly 80% of electricity production is from non

fossil sources, the main drivers for energy efficiency are meeting the rapidly growing

electricity demand and the peak demand in an economically sensible fashion and for

social policy reasons particularly among low income households.

1.3 Main Characteristics of the Programme

Brazil is probably the only developing country so far to have a long standing wire

charge mechanism in place. Although the wire charge is on generation, transmission

and distribution companies, in practice the 64 distribution utilities are responsible for

the energy efficiency programme design and implementation in their service

territories15

. All distribution utilities are required in their concession contracts signed

with ANEEL to spend at least 1% of their revenues on public service benefits.

The split between the energy efficiency and research and development elements has

varied considerably over time as shown in Table 1.1. The funds are also used to

14 http://www.reeep.org/file_upload/2785_tmpphpC9wvEx.pdf 15 Funds from the generation, transmission companies are destined for the R&D programmes supervised by ANEEL and also some for CTEnerg. CTEnerg is the energy sustainable energy fund which aims to finance programmes and projects in the area of energy with special emphasis in the area of energy efficiency in end use. The emphasis is on R&D which addresses the long term challenges in this area and can include alternative sources of energy and waste reduction.

http://www.reeep.org/file_upload/2785_tmpphpC9wvEx.pdf

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support the activities of the EPE (Energy Planning Company) which is owned by the

Ministry of Mines and Energy16

.

The variations over time in the amount of the wire charge to be spent on energy

efficiency are as a result of various laws passed by the Brazilian Congress. In 2007, the

Congress passed a law which reinstates the energy efficiency allocation to be 50% of

the total revenues generated through the wire charge. There is a further restriction since

2005 that half of the energy efficiency funds must be spent on measures targeted at low

income households.

Year Energy Efficiency R&D EPE

1998-99 0.9 0.1 -

2000-03 0.5 0.5 -

2004-05 0.5 0.4 0.1

2006 0.25 0.6 0.15

2007 0.5 0.4 0.1

Table 1.1: Allocation of the 1% wire charge used in Brazil from 1998 to 2007

Although the Government decides the apportionment of the wire charge between the

various public benefit areas, ANEEL is responsible for most of the execution. ANEEL

is responsible for defining the energy efficiency priorities and for approving the energy

utilities’ annual plans.

Over time there have been further gradual changes to the rules enacted by ANEEL

regarding eligible activities. Initially, utilities were allowed to use up to 65% of the

energy efficiency allowance in supply side measures to reduce their technical and

commercial losses. However since 2000, the emphasis turned to end use measures as

well as utility programmes for education and awareness on electricity saving and

municipal energy management. The use of wire charge resources for marketing was

eliminated in 2000 and minimum allocations for different economic sectors were

introduced.

Furthermore projects could be extended to run for more than one year. Additionally,

ANEEL had gradually restricted the options available to the utilities and has set upper

limits of the cost benefit ratio to the utility itself of 0.85 for most projects and 1.0 for

public lighting17

.

In the years 2003 and 2004, seven utilities alone were responsible for more than 70% of

the total investments made in energy efficiency programmes. The remaining fifty

seven utilities are located in more dispersed areas of the country and have smaller

programmes and probably higher costs associated with their implementations.

However there is no difference in the way that the utilities are treated. In particular, the

rules applying to the end use sectors to be addressed are the same for every distributor

irrespective of local conditions.

16 EPE employs around 250 people and its main role is the development of Brazil’s large and newly found reserves of oil and gas and new hydroelectric schemes. 17 Anything greater than 1 is in the utility’s interest anyway

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1.4 Monitoring and Verification

To date there has been limited monitoring and verification of the utility programmes in

terms of verifying the energy savings. Each distribution company submits proposals

which estimate the expected energy savings from the project and ANEEL approves or

rejects these. To date, the ex post evaluation tends to focus mainly on expenditure

verification rather than energy savings.

The cost benefit ratio used by ANEEL is an ex ante indicator that considers the

estimated annual savings accruing from a specific project compared to the annualised

cost of the project including operation and maintenance costs. From 2001 all had to

have a cost benefit ratio of below 0.85 except for public lighting which could have a

ratio of 1.

It is important to realise that low cost benefit ratios for the utility can have extremely

attractive national and consumer benefits in terms of the cost to save a unit of electricity

(R$/MWh) and also reduced peak demand benefits (R$/kW). Examples from the year

2003 are shown in Table 1.2 ranked in terms of the cost benefit ratio. For comparison,

the spot electricity prices in Brazil in this period varied from 6.4 to 49.4 R$/MWh.

Table 1.2: Comparison between the cost of saving a unit of electricity (R$/MWh)

and avoided capacity (R$/kW) for energy efficiency initiatives undertaken by the

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distribution companies under the wire charge scheme in 2003 (Source Jannuzzi

2008). 18

It is interesting to note that the larger of the utilities, such as the one that serves Sao

Paulo, have started to see business opportunities with energy efficiency in their

distribution areas. They have created their own ESCOs and as this is an unregulated

activity, they can operate in other distribution areas and capture economic returns on

their investments in energy efficiency. However they only operate with those

customers who consume significant energy and who may also purchase other services

and equipment.

The market is liberalised for all consumers with an electricity demand greater than

3MW. Consequently, many utilities are also using energy efficiency programmes as

part of their strategies to retain their larger electricity consuming customers who are no

longer captive

The criticisms by Jannuzzi (see footnote 7) seem to have been heeded by ANEEL. He

criticised that there was too much emphasis on bureaucratic procedures, the

programmes were annual submissions and focussed mainly on expenditure verification

rather than energy savings. The changes in 2008 moved from annual programmes to

continuous submission of programmes, allowed utilities to propose more innovative

projects and there was more ex post evaluation by the Regulator. Finally, a definition

of major projects was introduced whereby utilities can collaborate to achieve their

collective aims.

1.5 Evaluation and Impact of Wire Charge

It is difficult to establish precise figures for the energy saving achieved by the

programmes monitored by ANEEL. The publicly available information is mainly

through the UNICAMP studies and this data only goes out to 2002 in deducing energy

savings. Table 1.3 shows the information currently available.

Period Number of

Utilities

Total

Investment

€ million19

% in End

Use

Programmes

Avoided

Demand

(MW)

Energy

Savings

(GWh)

1998-99 17 49 32 250 754

1999-00 42 54 40 369 994

2000-01 53 25 94 n/a n/a

2001-02 60 41 99 496 1498

2002-03 28a

28 100 n/a n/a

2003-04 40b

48 100 n/a n/a a based on data from the major 28 utilities

b based on information from the Association of Power Distribution Utilities

18 “Incentives and Disincentives for Utility Driven DSM in Brazil” Gilberto Jannuzzi, March 2008 19 All Brazilian Real costs are converted at 0.4 Brazilian Real to the Euro

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Table 1.3: Total investment in regulated utility energy efficiency programmes in

Brazil 1998 – 2004 (Source: World Bank using Universidade Estadual de Campinas -

UNICAMP)

It is worth noting that the Procel expenditure on projects relating to end use energy

efficiency is considerably less than that shown in Table 1.3; in the period up to 2004, it

was estimated that Procel had spent around €50 million during the same period, i.e.

about a factor of 5 less20

.

As shown in Figure 1.1, between 1998 and 2003, public lighting dominated most of the

resources of the energy efficiency programmes of the utilities. Although this only

accounts for 3% of annual electricity consumption, the drive for this was in part

minimising losses from the sales to municipalities rather than traditional energy

efficiency considerations (see further discussion in Section 1.6).

Utility Investment by End Use Sector

55%

22%

14%

9%

Public Lighting Residential Industry Tertiary

Figure 1.1: Breakdown of the utility investment by end use sector under the

Brazilian wire charge mechanism for the years 1998 -2003 (source Jannuzzi 2007).

In 2006, some €120 million were spent on energy efficiency programmes by utilities21

.

1.6 Deadweight/additionality

I have been unable to find any quantitative discussion of this concept regarding the

energy savings achieved by the Brazilian wire charge mechanism.

Given the concerns by UNICAMP on the focus by the distribution companies on

revenue reduction rather than the most cost effective energy savings, it is clear that

there must be some deadweight as many of the activities were in the distributors’

commercial interests.

20 World Bank 21 Gilberto Jannuzzi at 7th Meeting of the Global Forum on Sustainable Energy, “Regulatory Experience in Energy Efficiency in Brazil: Some Lessons Learned”, November 2007.

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There are several reasons why the public lighting programmes have proved so popular

with distribution. They include the relatively low tariff for street lighting and a poor

payment history of many municipalities. Another reason was that there was an activity

by Procel and Electrobras to fund 75% of the investment of new public lighting systems

at very low rates of interest. The remaining 25% could be funded through the

distribution obligation but the whole cost of the investment can be counted towards the

fulfilment of the 1% wire charge obligation. In these circumstances, it is doubtful if the

deadweight for public lighting programmes is small.

1.7 Cost recovery

Although the initial 1% wire charge is part of the price setting and so fully recovered in

the tariffs, there still remains a utility disincentive resulting from the lost revenues

arising from the energy efficiency programmes. This affects not only the private

utilities (more than 80% is sold by private companies) but also the public utilities which

depend on private shareholders and bonds in stock markets. The price regulation is

such that there is a natural incentive for utilities to increase their profits by increasing

their sales. This has consequently resulted in a focus (e.g. public lighting) where there

is also a direct benefit to them in terms of either reduced commercial losses or to meet

the demand of new customers without new investments in the distribution sector.

Since the introduction of the 50% minimum expenditure on low income programmes in

2005, the distributors have stepped up the investment in this area. For example in

2006/07, 66% of energy efficiency investment was spent on low income programmes,

6% on industrial sector and 28% on all other end use sectors (Source; ANEEL 2007).

The main focus of the low income programmes implemented by utilities are installation

of CFLs, energy efficient refrigeration, improvements in internal wiring, solar water

heaters and the regularisation of connections22

(see Table 1.4).

End Use Measures % of Investment

Solar water heating 5%

Refrigeration 52%

Lighting 38%

Other 5%

Table 1.4: Investments in the low income energy efficiency programme by end use

measures in 2006-7. (Source: ANEEL 2008)

1.8 Trading

This is not applicable in Brazil.

1.9 Reduction in Peak Electricity Demand

22 Several utilities in Brazil have large commercial losses due to consumers connecting illegally or difficulties with bill payment or insolvency of these customers. By reducing their electricity bills and improving their connections, there is greater chance of reducing the losses in sales.

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From the limited data shown in Table 1.3, by the year 2002 peak demand reduction of

0.5 GWe had been achieved through the Brazilian energy efficiency obligations. This

can only have increased in subsequent years.

1.10 Areas for improvement

ANEEL have continually tightened the requirements for the energy efficiency

programme activity within the wire charge over the years. However, it would appear

that there is still some scope for further tightening. For example ANEEL are

introducing accounting procedures to ensure that economic benefits from investments

done under the wire charge obligation and which accrue to the distributor are also

returned to the consumers at the time the tariffs of the distributor are reviewed.

Although the price control formula for the electricity distributors still has a “volume of

electricity” component, given the high annual growth rates of electricity consumption,

this is less of a problem than would be the case in European markets.

Perhaps the biggest area that needs to be addressed is the additionality of the projects,

particularly when funding for public lighting is available from both Procel and the

distributors but the jointly funded projects can be claimed 100% by the distributors

rather than a pro rata share of the energy savings.

As UNICAMP have remarked, ANEEL’s role could be further enhanced with more

coordination amongst the individual programmes and better knowledge of the energy

efficiency potentials available.

1.11 Future Trends

The current phase of the Brazilian wire charge mechanism runs to the end of 2010. The

plans for the distribution companies from 2011 onwards are to reduce the energy

efficiency requirement to 0.25% and to increase the contributions from the wire charge

to the energy planning company, the R&D activities and to CTEnerg.

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Case Study 2: France

2.1 Context

The French White Certificates have been in place since July 2006 and arose out of the

new French energy policy law passed in July 2005. It places an obligation on suppliers

of electricity, gas, domestic fuel (but not currently for transport), LPG, cooling and heat

to save energy in the residential and commercial markets.23

White Certificates are a key part of the French policy to reduce energy intensity by 2%

per year until 2015 and then by 2.5% until 2030. It particularly is designed to focus on

the more diffuse potentials of energy savings in the residential and tertiary sectors and

was intended to provide a new means of financing energy efficiency projects in these

sectors.

2.2 Objective

The French White Certificates are intended to encourage the efficient use of energy in a

liberalised market. Additionally, it hopes to encourage the development of the energy

service approach.


The target is both set and administered by the French Government. Over the period

July 2006 to June 2009, the national target was 54 TWh life time savings of final

energy with the energy savings discounted at 4% (known as TWh cumac). The target

was shared out between the obliged energy suppliers based on their market shares by

energy volume in the residential and tertiary markets and the prices of the energies.

The targets do not prescribe how energy suppliers should attain these energy efficiency

savings24

. Certain organisations who are not obligated energy suppliers can earn

White Certificates in their own right – “non obliged or eligible parties”. These include

local authorities and also companies whose main business is not energy efficiency and

provided that the energy saving action induces no direct income for the company.

There are 182 energy efficiency measures with deemed energy saving values including

~60 in the residential sector and ~80 in the commercial sector. The target can be

reached either by implementing end use energy saving or by buying energy saving

certificates. If the target is not met, there is a penalty of 2 eurocents/kWh life time final

23 The obligation is determined in function of the providers’ sales to residential and tertiary sectors but actions in industry are also possible except for installations included in the EU Emissions Trading Scheme. 24 Energy savings from only fossil fuel substitution are not eligible

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energy for each unit of saving missed. The first target was exceeded by 20% with the

extra savings being carried forward to the second phase which starts in 2010.25

The allocation of the target by energy source is 57% electricity, 26% natural gas, 13%

domestic oil and 4% others. Because of the structure of the French electricity and gas

markets, around 80% of the obligations fall on two suppliers, EDF (30TWh) and Gaz

de France (13 TWh). The other 20% of the obligation falls on around 2,500 energy

suppliers26

. There are exemptions for small suppliers which are below 0.4 TWh27

except for domestic oil providers where all suppliers are obligated.

As with other Energy Efficiency Obligations, the French system permits deemed, or ex

ante, savings as well as calculations being done on a one by one basis; the deemed

savings appears to be the preferred route. Because of the widely varying climatic

differences across France and its Territories, deemed energy savings vary for the 3

different climatic zones.


This is anticipated as being similar to the Italian model (see Case Study 3) i.e. most

measures are evaluated ex ante and the others, without deemed energy savings, must be

evaluated with more elaborate M&V methods. .

2.5 Evaluation and Impact

The energy savings of the 1,100 projects in the first phase of the French White

Certificates are broken down by end use in Table 2.1 – it is clear that the mass market

approach (residential sector) has dominated although the commercial and industrial

activities have started to increase in importance.

Sector

Actual first phase (July

2009) % kWh cumac

To end September 2009

% kWh cumac

Residential building 91.1% 83.8%

Industry 4.4% 7.8%

Commercial building 3.0% 6.3%

Systems 0.8% 1.8%

Transport 0.8% 0.3%

Table 2.1: Outturn of the energy savings attained to July 2009 (end of the formal

first phase) and by September 2009 broken down by end use (source Ademe).

The breakdown of the energy savings achieved in the first phase by energy efficiency

measure (65 TWh cumac) are shown in Figure 2.1. The dominance of heating

25 Nicholas Dyevere at http://www.efiees.eu/en/forum_varsovie_2009_site864.html By the end of September 2009, these savings had grown to 84.5 TWh cumac and the excess will be credited to the next phase. 26 There are 2,452 heating oil suppliers accounting for 13% of the target. 27 For suppliers of LPG, the threshold is 0.1 TWh in the year

http://www.efiees.eu/en/forum_varsovie_2009_site864.html

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measures is clear and is certainly in marked contrast to the experience in the other 2

European Case studies (Italy and UK). This reflects both the high deemed energy

saving value of the boiler replacement measure discussed in section 2.6 compared to

other countries and also the fact that boiler purchases are handled differently from all

other market purchases in the French White Certificates.

Ademe have estimated that the total expenditure by all parties during the first phase

was 4 billion euro but this figure includes the full cost of the measures where a boiler is

replaced i.e. the full cost of installing a condensing boiler is counted and not just the

differential cost between the condensing boiler and that of a non condensing boiler28

.

Figure 2.1: Breakdown of the energy savings by end use for the first phase of the

French White Certificates (source Ademe).

Ademe have obtained from the 3 main obligated parties EDF, GDF and

ECOFIOUL(association of fuel deliverers) a breakdown of their direct and indirect

costs to meet their energy saving targets. Although the ratio of direct to indirect

expenditure by the three vary widely, they all have an overall cost to the organisation of

saving a unit kWh cumac between 0.33 and 0.34 eurocents i.e. slightly above the

market traded average price of 0.32 eurocents (see also section 2.8).

2.6 Deadweight/Additionality

In general, the design of the projects under the French White Certificates attempts to

ensure that any claimed savings are additional to those which would have been attained

otherwise. For example, the baseline is the current housing stock (for heating systems

and buildings envelope actions)29

or the market average (for other actions, such as

appliances, lighting etc).

28 For comparison, if the French approach to counting customer contributions was adopted for the UK EEC2 phase, the contributions from customers to boilers would increase from €40 million to over €4 billion. 29 This is a more generous deemed energy saving value for boilers than in the UK where condensing boiler installation became mandatory in nearly all retrofits under the 2005 Building regulations.

17%

74%

3%

6%

Insulation

Heating

Equipment

Others

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In France, tax credits up to 50% of the capital costs have been introduced for

householder who have certain energy saving measures installed professionally (e.g.

insulation, efficient heating). These are allowed to be claimed in conjunction with

White Certificates by an obligated energy supplier. While this will undoubtedly speed

up the early introduction of new energy saving technologies, the progress in market

penetration of the individual technologies will need to be monitored and reduction

and/or elimination of double subsidies reviewed as appropriate. Certainly the view of

Ademe in January 2009 was that the tax credit drives the demand for insulation and

heating measures and is the real economical trigger. Ademe felt that the White

Certificate activity helped the offer to develop and makes the promotion of the tax

credit more widespread. Their initial conclusion was that to that date, the White

Certificate mechanisms were more complementary than additional in these areas.

2.7 Cost Recovery

The law allows for the costs of the energy suppliers in attaining White Certificates to be

passed on via increased prices to the end user for those which still have regulated tariffs

(e.g. gas and electricity users in the residential sector). However, no such allowance

was made for the first phase.

2.8 Trading

The energy saving actions in France can be performed by either the obliged or non-

obliged companies provided they satisfy the additionality criteria. The main actors are

the energy suppliers, local authorities and large companies saving their own energy.

The White Certificates are issued by the French Ministry of Economy, Finance and

Industry after the completion of the energy efficiency action. For the first phase to July

2009, 77% of the 65 TWh cumac awarded were to obliged parties and the remaining

23% to non obliged parties (mainly local authorities and social housing providers).

It is possible to buy or sell certificates, but the volume traded has been very low (less

than 4% of certificates). The average market price has been 0.32 euro cents per kWh

cumac which is well below the penalty price of 2 eurocents/kWh. The sellers have

been mainly eligible parties such as local Authorities and some companies. EDF has

said that it will not use the market and such a statement from a large obligated party

appears to have affected the French marketplace which has developed even more

slowly than the Italian one.



technologies which reduce the peak demand in different seasons. Eyre et al30

attempted

a similar broad estimate by assuming that the energy savings followed the load curve.

30 N J Eyre et al at eceee summer conference 2009 http://www.eceee.org/conference_proceedings/eceee/2009/Panel_2/2.164/


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This can be either an over or underestimate depending on which season the peak

demand occurs and the energy efficiency measures itself.

The present analysis has reviewed that work and concluded that the peak reduction for

France is likely to be <0.1 GWe. This is considerably lower than that in the other case

studies due to the dominance of boiler savings in the French scheme.

2.10 Areas for Improvement

It would appear that the normal retail outlet to households for energy efficient measures

such as lighting and appliances are not being utilised to the maximum effect. To

achieve the desired market transformation in these products, then the normal retail

outlets for these need to be involved in the delivery of the energy efficient goods. As

the first phase of the White Certificates explicitly forbade non obligated parties from

increasing their sales through promotion of energy efficiency measures, these routes

have not been utilised to the same extent as they are in the UK for example.

2.11 Future Trends

The expectation is that suppliers of road transport fuels will be included in the

obligation; that the threshold for energy supplier obligation will be increased (should

reduce the number of oil suppliers dramatically from the current figure of 2,452); and

that the eligibility criteria for White Certificates will be reviewed. The legal aspects

should be concluded in the spring 2010.

The next phase will run for 3 years from July 2010 with an energy saving target which

is likely to be increased by at least a factor of 5 (or about 3 times the target for the

existing obligated parties). In the meantime, the energy suppliers are continuing with

their energy saving programmes and as of end September 2009, savings of over 30

kWh cumac had been recorded additional to the savings recorded at the end of June

2009.

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Case Study 3: Italy

3.1 Context

Italian White Certificates have been in place in Italy since January 2005. The

obligations were originally placed on 10 electricity distributors and 20 gas distributors

in Italy and covered 79% of final energy distributed. However, in practice Enel had

~90% of the electricity target and Italgas had over 30% of the gas target. In 2008, the

coverage of White Certificates was extended to all companies distributing to more than

50,000 customers (previously 100,000 customers). The obligation now covers 14

electricity distributors and 61 gas distributors in Italy; furthermore the target now is

representative of final distributed energy as the individual obliged distributor targets by

volume are scaled upwards from their market share of energy distribution covered by

the obliged companies to the total energy distributed. Enel now has ~87% of the

electricity obligation and 3 gas distributors have ~45% of the gas obligation31

.

The Italian Government was responsible for setting the size of the obligation and in the

Italian National Plan, it is expected that one third of the expected carbon dioxide

savings by 2012 will come from the White Certificate activities.

3.2 Objective

The White Certificates have always been driven by the Italian Kyoto commitments and

were designed to be coherent with the framework that Italy would be expected to meet

under the EU Directive of Energy End Use Efficiency and Energy Services. Another

important objective was to encourage the development of an energy services market.

The White Certificates cover all energy end users. Although in principle any fuel can

be saved, in practice to October 2009, electricity accounted for 74.7%, gas for 21.9%

and other fuels for only 3.4% of White Certificates issued by AEEG.


Under the current Italian White Certificates scheme, all electricity and gas distributors

servicing more than a 50,000 customers have targets which are based on their market

share of the distribution market served by the obliged distributors. The target is a

primary energy savings target expressed in tons of oil equivalent (toe)32

; one White

Certificate equals 1 toe saving. A White Certificate is equivalent to the average annual

electricity consumption of between 1-2 Italian households.

The target is based on annual energy savings in 8 year periods till 2012 inclusive. The

target is set such that by the end of 2009 cumulative annual primary energy savings of

3.2 Mtoe primary energy were to be achieved; these have been extended such that by

31 Italgas has the largest share (23%) of the gas distributors’ obligation. 32 Effectively this multiplies the end use savings of electricity by a factor of 2.5 so that a 1 kW of

electricity end use saving is equivalent to 2.5 kW of gas end use savings. 1 toe is equivalent to 11,630

kWh.

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the end of 2012, there must be 6 Mtoe primary energy savings attained for the first time

or 22.4 Mtoe cumulative annual savings33

. Additional energy savings above the target

can be carried forward to the next period.

There is no prescription on how distributors should attain these energy efficiency

improvements. However, there is an illustrative list of eligible projects. As well as

energy efficiency measures, distributors can also use supply options such as

cogeneration, solar water heating and PV panels. Energy savings from projects

contribute to the achievement of targets for up to 5 years (up to 8 years in case of

energy efficiency measures addressing building envelopes). The deemed energy

savings were revised in 2008 (lowered) and this had a marked impact on the price of

White Certificates in the market place (increased).

Obliged distributors have four options to comply with their White Certificate

obligation:

They can develop “in house” energy efficiency projects

They can develop projects either jointly or contact with other third parties such

as product manufacturers, retailers, installers, ESCOs, etc.

They can buy tradable energy efficiency certificates from the market which

attest energy savings achieved by third parties via the implementation of energy

efficiency projects; these third parties can include subsidiaries of the obliged distributor

or other distribution companies or energy service providers.

Alternatively the companies can pay the sanction for non-compliance with the

obligation.

Although distributors are allowed to carry out energy efficiency measures and

subsequently monitor them to determine the energy savings, to date nearly all the

projects have been based on deemed (ex-ante) energy saving estimates34

or scaling of

engineering estimates for commercial and industrial projects. Obliged energy

distributors have to submit to the Italian regulator sufficient White Certificates to meet

their target.

The Italian Regulator (AEEG) is responsible for the development and definition of

technical rules, administration, monitoring and enforcement of the whole mechanism.

It also issues the “White Certificates”. Carrying forward White Certificates from one

year to the next is permitted.

33 Note the 2012 cumulative target is more stringent than appears at first sight since the “scoring”

mechanism only counts savings for a maximum of 5 or 8 years depending on the measure installed and

so by 2012, some of the 5 year saving measures will no longer be counted towards the 2012 cumulative

target. 34 Deemed savings apply to technologies for which energy savings are well known e.g. CFL, m2 of

insulated wall, small PV applications and high efficiency boilers. The minimum project size for deemed

energy savings is 25 toe per year

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3.4 Monitoring and Verification of Certificates

Measurement and verification is crucial to the efficient functioning of a tradable

certificates mechanism so that players in the market can have confidence in the

certificate. This is achieved by AEEG having a rigorous monitoring and verification

system so that the Italian White Certificates can serve as an accounting tool and thus

prove the corresponding amount of energy has been saved.

AEEG provides specific guidelines on the preparation, measurement and evaluation of

individual projects. Subsequently documentation has to be transmitted to the Regulator

to allow verification and validation on a project by project basis before the Italian

White Certificates are issued. As most of the activity is related to be deemed or scaling

of engineering estimates, then this effectively becomes verifying that the energy

efficiency measures were installed and are in place. This process is subject to a random

audit by the Regulator.

The Regulator AEEG makes an allowance in the distribution price formula to cover the

costs of the Italian White Certificates. In the first phase, this cost was assumed to be

€100/toe of primary energy saved. AEEG has estimated that the break down of where

energy savings were achieved is as shown in Figure 3.1 for 2005-8.

Figure 3.1: Breakdown of where the Italian White Certificates were generated in

the period 2005-8 inclusive (source AEEG)

To May 2009, 85% of the energy savings achieved were done through the deemed

energy savings method with the 2% being engineering estimates and 13% from large

energy saving projects which were monitored.

81% of the savings were attained by registered “ESCOs” (energy saving Companies).

However, it should be borne in mind that The Italian registered ESCO definition

includes installers of energy efficiency equipment and so there are not necessarily any

of the usual attributes of a traditional ESCO e.g. energy supply, shared savings or

Italian White Certificates 2005-8

58%23%

6%

10%3%

Household electricity Household heating Public lighting Industry CHP and community heating

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shared risk or guaranteed energy savings. Compared to the more traditional EU

definition35

, there has been little development of such “genuine ESCOs”.

Public lighting has been the most popular non residential measure (but now is

decreasing in activity) and while electricity savings in households through CFLs and

appliances have been significant, it is noticeable that the most common measures in the

UK programmes of improving heating efficiency through insulation and also the

installation of more efficient boilers are not so prevalent in Italy. In the industrial and

commercial sector, other important energy efficiency measures include motors and

drives, inverters, air conditioning in the service sector, schools, hospitals and offices.

3.5 Evaluation and Impact of Italian White Certificates

The Italian White Certificate obligation has been in a great success in meeting annual

targets.

For the first year (2005), nearly 90% more certificates were issued than required to

meet the target. This was in part due to the delays in actually implementing the White

Certificate mechanism; energy savings from projects dating back to 2001 are included

and these accounted for 62%of the total White Certificates issued.

In the period 2005-08 inclusive, cumulative energy savings of 3.7 Mtoe were saved

against a target of 3.2 Mtoe. Overwhelmingly, the energy savings were from electricity

– 77% electricity, 19% natural gas and 4% other fuels.

3.5.1 Energy and Carbon Savings

In Italy the cumulative energy saving targets for 2008 were equivalent to >8 TWh

electricity saving and >18 TWh gas savings (both figures in delivered units). The

Italian regulator has reported that the combined target was easily exceeded but as

mentioned earlier, the contribution from electricity savings was much greater than

expected. The 2008 annual savings target (2.2 Mtoe/year) corresponds to 1.8% and

1.4% of Italian electricity and gas consumption respectively36

.

The 2008 target of 2.2 Mtoe/year with the above mix of fuels saved implies that the

carbon dioxide savings are over 4 Mt CO2/year37

.

3.5.2 Financial Benefit

35 For example as defined in the EU Directive on End-Use Energy Efficiency and Energy Services. 36 It is interesting to note that since the start of the Italian White Certificate scheme, there has been no growth in residential electricity demand to the end of 2007; in the equivalent period 2001-4 prior to the scheme, growth was averaging 2% per year.(source Eurostats: Electricity consumption of households). As most of the electricity savings were in the household sector (78%), then as a percentage of residential electricity consumption the savings from White Certificates would be of the order of 6-7%. 37 This is higher than the 3.9 MtCO2/year expectation of the original target due to the higher contribution from electricity savings than originally expected (electricity CO2 content/kWh in Italy is more than a factor of 2 higher than the equivalent figure for natural gas).

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The regulator AEEG will publish detailed information on the financial benefits to end

use consumers at the completion of the first phase in 2012. AEEG has published

annual reports and it is clear that the financial benefits are very positive. For example,

the amount allowed in the distribution price formula of €100/toe to the end of 2008 and

€89/toe since then is at least a factor of six less than the price of electricity and natural

gas to residential customers. The €100/toe initial allowance is the equivalent to a cost

of 2.2 eurocent/kWh saved of delivered electricity and 0.9 eurocent/kWh saved of

delivered gas being recovered from residential customers. This compares favourably

with the then prices to residential customers of 16.6 €cents/kWh for electricity and 4.3

€cents/kWh for gas.

The latest AEEG Annual Report on the results achieved by the mechanism was

published in December 2009. It compared the private cost of the system for an average

household to some of the public benefits linked to one toe saved: the cost for an

average household in 2008 was 2.8 €/year (based on the tariff charge) and could

amount to 6.4 €/household/year in 2012. The benefits for the country were: in terms of

avoided CO2 emission costs, they range from 46 €/toe to 350 €/toe (with an emission

allowance priced at 20 €/toe and 100 €/toe respectively); in terms of avoided renewable

costs (again associated with the EU 20-20-20 target), they range from 72 to 237 €/toe;

this mean that the public benefits associated only to the 20-20-20 package range from

118 to 587€/toe against a cost of 89-100 €/toe and are additional to the already positive

private benefits of the Italian WCs.


Deadweight is taken here to mean the subsidising or support for those measures which

would have happened anyway. This is tackled in the Italian system in a variety of

ways. For example, for energy efficient appliances, a baseline of the average energy

efficiency sold is used and it is acknowledged that as the baseline is dynamic, there is a

need for regular updating. In general, the determination of additional savings are

tackled by the use of market averages for the baselines from which energy efficient

savings from lighting, appliances and boilers are determined or, in the case of new

buildings, from the energy savings from measures which exceed the building regulation

requirements. For other areas, default factors can be used to account for deadweight

which cannot be controlled, but the most common approach to date in addressing

additionality is via baseline setting.

For projects not covered by deemed savings or engineering methods, project developers

have to demonstrate additionality within their methodological proposal, that has to be

approved by the regulator before it can be applied. The accepted technological baseline

is the average technology sold at the national level to produce the same level of energy

service (unless more stringent legislative requirements exist).

While this approach tackles additionality at the energy efficiency measure level, it does

not tackle policy additionality (see section 3.8).

3.7 Cost Recovery

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In Italy cost recovery is allowed for every certificate delivered by the distributor as long

as that distributor's total saving target for the year under consideration has not been

achieved. Starting from 2009, the cost recovery rate for all obliged distributors is

adjusted annually to take into account the average reduction (or increase) in electricity,

gas and fuel for transport gross sale prices relating to small energy end-users; the higher

the average price reduction the lower the cost recovery rate granted. Cost recovery is

also allowed when the energy savings are from the customer base of another distributor.

The cost recovery is net of any contribution from other sources. Finally, cost recovery

is allowed for all fuels saved except fuel for transport.

Until 2009, the rate was fixed in the distribution price formula at €100/toe and in 2009

it is €89/toe38

.

3.8 Trading

Full trading of the certificates is allowed under the Italian White Certificate

programme. Any accredited party can achieve savings provided they satisfy the

Regulator that they have installed energy efficiency measures appropriate to the savings

claimed39

. The White Certificates are traded on a specific market place, organised and

administered by the Electricity Market Operator (GME) according to rules approved by

the Regulator, or through bilateral trading (over the counter). GME also operates the

“Power Exchange” and the “Green Certificates” market for renewable energy. The

market was opened in March 2006.

Figure 3.2 shows the prices of White Certificates for both electricity and for gas since

the inception of the market. Over the first few years of the market, it is noticeable that

the gas price was higher than the electricity price. During this period, only 20% of

White Certificates were traded on the market and most White Certificates were done as

bilateral or subcontract arrangements with the energy distributors. One of the reasons

why the gas prices might have been higher was that the (then) twenty gas distributors

collectively argued that it is harder for them to meet their targets as they do not know

the customers.

38 €100/toe corresponds to about 2.2 eurocent/kWh in case of savings of delivered electricity savings or

0.9 eurocent/kWh for savings of delivered gas. 39 Since 2008, large end-users (companies with an energy manager) have also become accredited bodies.

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Figure 3.2: Market price of Italian White Certificates; tipoI are electricity

certificates, tipoII are natural gas certificates and tipoIII are other fuel

certificates.

By 2007 White Certificate prices were on average around €40 for electricity, €77 for

gas and €22 for other fuels.

Following the reforms by the energy regulator at the end of 2007, the market for White

Certificates has operated more actively. From mid-2008 both quantities and prices of

bilateral deals (i.e. of over the counter trades) have to be registered. The obligation to

register bilateral prices has been introduced by AEEG in order to increase the

transparency of trading, to the advantage both of market operators and of the Regulator.

Market signals, if not distorted, monitor the costs incurred by the system to meet its

energy efficiency goals, and they are one of the possible reference parameters for

updating the tariff contribution and defining the penalty for non- compliant parties.

The prevalence of bilateral trading is linked to an array of factors, including the

opportunity to conclude (bilateral) forward contracts to hedge against the risk of price

volatility and, for the major obliged distributors, obtaining large quantities of

certificates “in one shot” as compared to the smaller quantities of certificates being

offered so far during market trading sessions.

Between June 2007 and May 2008 Italy has seen buoyant trading (mostly bilateral, but

an increasing share of spot market trades). Indeed in 2007, 304,932 certificates were

traded on the spot market and 556,742 certificates were traded bilaterally against an

actual saving target of 633,382 certificates40

. More than 80% of the certificates were

issued for energy efficiency projects implemented by non energy obligated parties.

In January 2009, four white certificate types have been introduced in order to

distinguish among electricity, gas, fuel for transport and other energy savings. Type I

certificates relate to electricity savings, type II certificates relate to gas savings, type III

certificates relate to other energy savings and type IV certificates relate to savings of

fuel for transport. It is expected that the volumes of Type IV certificates issued will be

40 The total amount of certificates traded amounted to 136% of the 2007 target: the spot market trades

represented 48% of the saving target whereas bilateral trades represented 88% of this target.

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low because of the lack of cost recovery for obliged parties. This happened previously

with Type III certificates when prior to 2009, energy savings other than electricity and

gas savings were not eligible for cost recovery.




attempted





Italy due to electricity savings in the period 2005-7 is likely to be <0.3 GWe. This is

lower than the Eyre et al estimate due to the dominance of CFLs in the Italian scheme

which will have a poor correlation with summer peaks.


The initial five year fixed period was perceived as a problem as it did not provide long

term continuity for Energy Efficiency Obligations. However, the extension and

expansion to 2012, has seen a marked increase in activity. Activity beyond 2012 will

need to be addressed soon to ensure that momentum is not lost.

One of the issues that Italy will need to examine again is how the life time issues of the

individual projects are addressed. For example, insulation measures which can save

energy and carbon dioxide for at least 30-40 years are not awarded their full benefits

under a scheme which only counts savings from a few years.

Over the period 2001-2007, almost 21 million CFLs were delivered to comply with the

obligations for the period 2005-2007. This confirms the driver for distributors to focus

on primary energy and short measure lifetimes that discourage thermal envelope

measures in buildings which would save gas or other primary energy sources. Prior to

the legislative changes of 2008, distributors could get €7.3 per CFL (€3.65 per CFL

distributed as a free token) compared to a CFL cost for distributors by the end of that

period of less than €2 per CFL which also explains the interest in lighting measures.

After the legislative changes of 2008, distributors will receive at most 2.1 Euro/CFL,

but as CFL prices have continued to decrease, it is likely that they will continue to be a

favoured option until the incandescent light bulbs are banned from the market.

Other issues that should be addressed in the coming period are to re-examine the policy

additionality issues in the light of the availability of tax breaks as well as White

Certificates.



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Case Study 4: The United Kingdom

4.1 Context

Energy Efficiency Obligations have been in place in the UK since 1994, initially on the

electricity industry but since 2000 on both the electricity and gas suppliers. During this

time, the electricity companies moved from fourteen regional monopolies (and gas

from one national monopoly) to a fuller liberalised market with six major energy

suppliers all of whom supply both gas and electricity. Since 2002, the Government has

been responsible for setting the size of the obligation which was initially called the

Energy Efficiency Commitment (EEC) and from April 2008 is now called the Carbon

Emissions Reduction Target (CERT).

CERT is intended to represent an approximate doubling of energy efficiency activity

compared to the second phase of its predecessor EEC. EEC/CERT, along with

Building Regulation, form the main energy policy policies for tackling household

carbon dioxide emissions as part of the UK 2006 programme for tackling Climate

Change.

4.2 Objective

EEC/CERT has always been viewed primarily as an environmental policy to tackle

carbon dioxide emissions42

. Household energy use in the residential sector is

responsible for around 27% of total UK carbon dioxide emissions on an end used basis.

EEC/CERT is intended to stimulate greater investment in energy efficiency measures in

the household sector than would otherwise have occurred and at the same time to

support progress towards wider economic and social objectives.


Under the UK energy efficiency obligations, electricity and gas suppliers are required

to achieve targets for the promotion of energy efficiency improvements in the

residential sector. The targets are specified as follows: for EEC2 in lifetime energy

savings discounted at 3.5% and weighted for the CO2 content of the fuels saved; for

CERT, in lifetime CO2 savings (undiscounted). The CERT target in the 3 year period

to the end of April 2011 is lifetime CO2 savings of 185 MtCO2.

The targets do not prescribe how suppliers should attain these improvements and

suppliers can fulfil their obligations by carrying out any combination of approved

measures including installing insulation or supplying and promoting low energy light

bulbs, high efficiency appliances or boilers. The only constraint on the suppliers’

activities is that in CERT they must achieve at least 40% of their energy savings in low

42 There is a separate policy initiative targeted at tackling the problem of “fuel poverty” defined as requiring more than 10% of disposable income to heat the property to a modern acceptable standard.

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income households (those households on income related benefits and tax credits)43

. As

the UK energy market is fully liberalised, the CERT obligation only applies to those

energy suppliers with more than 50,000 customers to ensure that such obligations do

not act as an entry barrier to new suppliers.

As energy supply price restraints were removed in 2002 for electricity and gas in the

residential sector, there is no longer an allowance to cover the costs of this activity. In

other words, it has become a “cost of business” like other environmental considerations

or health and safety, etc. The Government makes a (conservative estimate) of the likely

costs of EEC/CERT to customers when it is setting a target. For example in the 3 year

period 2005-8, the EEC cost was nearly £7 per household per fuel per year. This was

23% less than Government had expected, allowing for inflation. The current CERT is

estimated by Government to be around £23 per fuel per household per year but is

expected to once again be at least 20% lower. This figure is still less than 4% of

average household energy bills.

In the two EEC obligation periods covering 2002-08, all energy suppliers met their

target and the indication is that this will also be the case for CERT (2008-11).

In terms of energy efficiency measures used by the energy suppliers, there has been a

tremendous growth in annual installations as shown in Figures 4.1.

Annual Installation rates ('000)

0

600

1200

1800

2000-2 2002-5 2005-8

Cavity Wall Insulation Loft Insulation Wet Appliances CFLs (divided by 20)

Figure 4.1: The average annual installations of various insulation measures over

the period 2000-08 associated with UK energy efficiency obligations (N.B. in the

period 2005-08, annual CFLs are actually 34 million etc.).

In terms of number of measures, CFLs and appliances dominate, but in terms of energy

saving insulation, particularly of empty cavity walls, is the most important activity. In

EEC2, insulation accounted for 75% of the energy savings achieved.

43 For EEC2, the corresponding figure for savings to be obtained for low income households was 50% of the target.

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This important function is carried out by the Energy Regulator, Ofgem. They are

responsible for providing guidance on the preparation, measurement and evaluation of

individual projects to the energy suppliers. It is by monitoring and verifying the

suppliers’ activity on an individual project by project basis that Ofgem satisfies itself

that the energy supplier has met their overall target.

As the UK system has always focussed only on small energy users and now just

householders, then the deemed, or ex ante, energy saving values has been the sole

method used by energy suppliers to deliver their targets. This has meant that Ofgem’s

role has effectively become verifying that the energy efficiency measures are on the list

which have deemed savings and that subsequently these measures were installed and

are in place. The process is subject to random audits by the Regulator and its agents to

ensure these conditions are met.

4.5 Evaluation and Impact of EEC

Full evaluations are available for the six years, i.e. the periods 2002-5 and 2005-8 are

available from eoinleesenergy.com.

4.5.1 Energy and Carbon Savings

Unfortunately, the EEC target was measured in lifetime discounted fuel standardised

units which although correctly carbon weighted between the differing fuels, do not

translate easily into actual electricity and fossil fuel savings44

. Unravelling these fuel

standardised units, the EEC245

. In terms of annual energy saving, these EEC2 savings

would be around 3.9 TWh/year for electricity and around 6.3 TWh/year for fossil fuels.

The carbon savings from EEC2 (excluding deadweight) are estimated at 59 million tons

CO2 lifetime or 2.1 million tons of CO2 per year in the middle of the Kyoto period

2010 (1.4% of household emissions).

The 6 years of EEC schemes have resulted in annual energy saving of around 6

TWh/year for electricity and around 8 TWh/year for fossil fuels. As a percentage of

residential final energy consumption in 200846

this equates to 5.1% and 2.2%

respectively.

44 A correction also needs to be made for the innovation factor which is used to encourage quicker penetration of innovative technologies being used in EEC for the first time by increasing the value of the energy savings from such technologies by 50%, i.e. they are awarded 150% of the energy saving value rather than 100%. Also a “snap back” or comfort taking of approximately 30% of the predicted energy savings from insulation measures needs to be removed to reflect the real electricity and fossil fuel savings. 45 These values are the life time energy savings discounted at a rate of 3.5%. 46 Digest of UK Energy Statistics 2009, Tables 5.1 and 4.1 respectively.

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From April 2008, the CERT target is expressed in lifetime carbon savings which are not

discounted with time. The first year’s results have been dominated by CFLs; 152

million (equivalent to 6 per household) of which the great majority were distributed

free by the energy suppliers. In terms of savings actually achieved in the first year (i.e.

excluding the energy savings carried forward from EEC2 to CERT), lighting accounted

for 38% of accredited savings. Although insulation is still the dominant measure in

terms of energy saving (56% of savings actually achieved in the first year), the scale of

the insulation activity has been much less than that expected by Government (75%). As

insulation measures are the major contribution to GB’s ambitious CO2 reduction plans

in the exiting residential housing stock, a review is underway to ensure that more

emphasis is placed on solutions which save a significant fraction of the properties CO2

emissions. From January 2010, CO2 savings from CFLs given away free will no

longer be counted towards the CERT target and it is possible that CFLs sold through

the retail route will no longer be eligible after April 2011.

4.5.2 Financial Benefit

During EEC2, the net resource benefit for saving each ton of carbon dioxide is around

£53, i.e. the net present value of the ongoing energy savings set against the costs of all

the parties involved is such that the UK benefits by £53 for every ton of carbon dioxide

saved. (See the evaluation of EEC2 for more details).

The net present value of the measures necessary to meet the EEC2 target after including

all party costs and benefits (including comfort but excluding deadweight) was £3.1

billion over the life time of the measures discounted at 3.5%. This NPV figure includes

a total cost to all players of £1.3 billion47

.

An alternative way of looking at this is that the cost to the nation of saving a delivered

unit of electricity or gas is 2.0p/kWh and 0.6 p/kWh respectively; both figures are

significantly less than the average consumer prices of those fuels in the EEC2 period of

10.1p/kWh and 2.6 p/kWh respectively.

4.5.3 Market Transformation

A) Penetration of the best energy efficiency products and associated deadweight

In general the market transformation effects in EEC2 have not been as marked as they

were in EEC1 for energy efficient appliances. Figures 4.2 and 4.3 show the situations

for the important cold appliances, fridge freezers and freezers. In each case the market

penetration prior to the start of EEC1 was fitted using a standard s-shaped curve widely

used in innovation and market transformation studies. This s-shaped curve was then

extrapolated to provide a baseline to estimate the genuine additional sales over the

baseline. The data points on the actual market penetration of A-rated products sold in

each of the financial years are joined by the dashed line in each of the figures.

In Figure 4.2, the area between the two curves represents those sales of A-rated fridge

freezers that have been advanced by the EEC1 and EEC2 energy supplier activity.

Conversely, if the sales supported by EEC exceed the sales between these two curves,

there is clear evidence of deadweight. 47 The accuracy quoted is a precision of +/- 10%.

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The deadweight in EEC2 was quantified by the equation:

% deadweight =100* (EEC2 supported sales – sales advanced in EEC2 period) /EEC2

supported sales.

The results for EEC1 are that deadweight was 34% whereas in EEC2 this rose to 52%.

Nevertheless, over the EEC2 period over 2 million fridge freezers were advanced ahead

of what would have happened otherwise.

Penetration of A-rated Fridge Freezers

0%

20%

40%

60%

80%

100%

98 99 00 01 02 03 04 05 06 07 08

Financial Year Ending % A-rated fit of s-curve

EEC1 EEC2

Figure 4.2: Development of the A-rated penetration of the fridge freezer market

1998 to end of March 2008 (source EST using GFK data).

For upright freezers, the deadweight figures were worked out in an identical fashion to

those for the fridge freezers and are much lower for the case of upright freezers. For

the two EEC periods they are respectively 22% for EEC1 and zero for EEC2, the latter

reflecting the recent upsurge in sales of A-rated upright freezers. As this is a much

lower selling product (total sales of around 630,000 per annum) than fridge freezers,

then the sales advanced during the EEC2 period are around 0.72 million.

However, this analysis also highlighted much higher deadweight associated with other

appliances such as washing machines which were virtually 100% deadweight in EEC2.

As a result of the above market developments, only A+ rated or better appliances are

being supported in CERT and recommendations have been proposed for 2011 onwards

that only measures whose market penetration is below 30% should be eligible for

promotion in such energy efficiency obligations.

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A-rated Upright Freezer Market

Penetration

0%

20%

40%

60%

80%

98 99 00 01 02 03 04 05 06 07 08

Financial Year ending % A-rated fit of s-curve

EEC1 EEC2

Figure 4.3: Development of the A-rated penetration of the upright freezer market

1998 to end of March 2008 (source EST using GFK data).

The market transformed markedly in the three year period of EEC1. As the EEC2

evaluation discusses, there are many factors contributing to the growth in sales of A-

rated cold appliances as shown in Figures 4.2 and 4.3. However, without the financial

incentives available from the energy suppliers, it is doubtful whether the transformation

could have taken off as quickly as it did.

B) Reduction of the costs of energy efficiency measures

As the scale of the energy efficiency measures has increased, then the costs of the

energy efficiency measures have fallen in real terms. This is shown in Figure 4.4 where

all measures, apart from cavity wall insulation (a mature technology), have fallen

considerably48

. (See evaluation of EEC2 for more details).

48 Note: the price shown for condensing boilers is the marginal increase relative to the non-condensing boiler.

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Figure 4.4: The real prices of energy efficiency measures over the period of UK

energy efficiency obligations.

0

0.5

1

1.5

2

2.5

3

1993 1998 2003

Ind

ex

re

al p

ric

es

(2

00

1=

1)

CFLs

Cavity Wall

Insulation

Condensing Boiler

HW Tank Insulation

Fridge Freezer (A-

Rated)

CWI (1994 street

price)


Deadweight is taken here to mean the subsidising or support for those measures which

would have happened anyway. In the early days of the Energy Efficiency Obligations,

deadweight was minimised by careful design of the projects, e.g. having local blitz

campaigns for insulation. However as the activity in EEC1 increased to such a level, it

was clear that energy suppliers would unavoidably pick up and meet the cost of

assisting consumers who would have taken the measures in any event49

.

The Government’s solution to the problem was to include the deadweight (based on

historical trends of “free market” installations) and to effectively build this into the

energy saving target. Deadweight is then removed from the carbon savings attained

under EEC1 to deduce the additional carbon dioxide savings.

The EEC2 evaluation looked at deadweight on a measure by measure basis and

concluded that the total deadweight in the EEC2 target was around 20%. This figure is

less than that expected by the Government.

4.7 Cost Recovery

There is no supply price regulation in GB and so effectively the energy efficiency

obligations are “a cost of doing business” – similar to complying with health and safety

and other environmental regulation. In reality, the costs are ultimately borne by the

residential end user customers.

49This is particularly true for energy efficiency measures sold through retailers – see section 4.5.

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4.8 Trading

Trading is permissible under EEC and CERT only between obligated parties, i.e.

energy suppliers. In EEC2, there were some sales of energy savings between energy

suppliers, but this was very small (<1% of overall target).

Nevertheless the way that EEC/CERT operates, there are many similarities between

trading and EEC’s operation. Energy suppliers have the ability since 2002 to trade

between different obligation periods and this has been utilised by the carry forward of

excess energy savings between the various phases of the obligation. This has the great

advantage of ensuring a smooth transition for the energy efficiency industry between

different phases and thus avoids the “stop start” nature of activity which was witnessed

in the earlier, more rigid transitions.

Throughout the 6 years of EEC, energy suppliers continued to show variation in the

way they choose to deliver the energy efficiency targets that they have been set. Some

of the variations in EEC2 mirror the previous observed variations in EEC1, e.g.

preference by E.ON for lighting, British Gas for heating and npower for appliances.

Variation is to be expected as there will be different positioning within the market on

issues such as the importance of branding (especially with appliance sales), home

services and maintenance, geographical location of (historical) customer base etc.

Additionally, some companies may have been more effective at securing lower prices

than others in certain energy efficiency areas.




attempted





UK due to electricity savings in the 3 year EEC2 period 2005-8 is likely to be at least

0.4 GWe. This estimate could double depending on the extent of the correlation

between the use of CFLs as intuitively they will be a strong correlation with the UK

winter peak demand for electricity. Quantification of this is beyond the scope of the

present study as no information is readily available.


A major criticism of EEC had been that it is not conducive to the introduction of new

energy saving technologies although there has been considerable innovation in the way

that energy efficient products are marketed and sold to householders. On the technical



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innovation side, only in CFL design and performance over the past 10 years was there

considerable change. Consequently the whole question of encouraging more

innovation was addressed in the design of CERT. As well as continuing with the uplift

of savings by 50% for innovative technology, there was also a demonstration option

introduced to encourage energy suppliers to utilise new technologies or techniques

which had no proven or deemed energy saving values. In effect, energy suppliers are

awarded a nominal CO2 saving from the demonstration project commensurate with the

costs of the project and this saving is guaranteed irrespective of the outcome of the

monitored CO2 savings from the demonstration project. It is too early to say whether

this has been successful or not.

As alluded to in section 4.5.1, there has been disappointment expressed by the

Government that the experience of CERT to date has not developed along the lines

necessary for the challenging CO2 goals set by Government for the residential sector.

This envisages “deep energy efficiency” retrofits to the existing housing stock i.e.

making improvements in lowering CO2 emissions from individual properties by

typically 40% or more. Particular concerns include:

Cherry picking of the most cost effective measures in a house rather than

addressing all cost effective energy saving measures

Very little area based approaches to both stimulate community involvement in

tackling climate change by reducing CO2 emissions as well as benefitting from

economy of scale in installation of measures by minimising driving time

between installations

Lack of significant energy service company approach despite 10 years of

Government support and initiatives within EEC

Confusion in householders’ minds by the competing brands and offers from the

energy suppliers

Suspicion from the householders that it is “unnatural” for an energy supplier to

want to sell less of its product

Consequently, the Government is undertaking a major review of how the energy

efficiency obligations from January 2013 might better address these concerns.

4.11 Future Trends

The UK Government has already signalled that post 2011 some form of supplier

obligation is likely to remain in place at an expanded level compared to today. The

Government has decided to bring the CERT scheme in to the same timeframe as other

trading schemes (e.g. EU ETS and the UK’s own Carbon Reduction Commitment51

).

Consequently, the existing CERT scheme has been extended to the end of 2012 and the

proposed target covering the period April 2011 to December 2012 will be published

soon. Additionally, the Government have launched the Community Energy Saving

Programme (CESP) which is a pilot whose results will help shape the energy supplier

obligation from 2012. CESP will be a local area approach focussing on the most

disdavantaged areas and trying to get several energy efficiency measures installed in

51 The CRC is a national CO2 trading scheme for larger companies and organisations (e.g. retail chains, universities etc) who will have to buy permits to emit CO2 from April 2011.

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each property by building in local community support. The rules for CESP are based

on those for CERT but are not identical.

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